When it comes to investing in the Total Stock Market Index Fund, one of the most common questions I get asked is – what is better.
VTSAX or VTI?
The two Vanguard’s Total Stock Market funds are some of the most popular investment funds in the world and it is a question that plagues so many of us.
So in this post, I want to break down these two funds. We’ll review the difference between an ETF and an Index Fund. And then we’ll delve further into comparing VTSAX with VTI and I’ll give you my take on when one might be better than the other based on your specific preference. And finally, I’ll go over my personal favorite and rationale.
ETF vs. Index
Let’s start out by getting a general understanding of ETF and Index Funds.
ETF | Exchange Traded Funds
ETFs, Exchange Traded Funds are, as its name implies, funds that trade like stocks on an exchange. When the stock market is open, they can be bought and sold continuously throughout the day. Because of its flexibility, they appeal to a wide range of investors and have really gained popularity in the last decade for both long-term investors and short term traders.
And ETFs come in all colors and sizes. There are ETFs like VTI that follow the total stock market index. And there are ETFs that follow foreign markets, bonds and commodities.
Index Fund – General Overview
Index funds on the other hand are passively managed mutual funds that track an index. Index like S&P 500, total stock market and many other securities. Because they are passively managed, they often have lower costs compared to actively managed funds.
5 Key Difference:
Now, what are the key differences between an ETF and an Index Fund? Let me review 5 of them.
1 – Timing of Share Price
First is the timing of Share Price.
There is a fundamental difference between how an ETF and an index fund is traded in the market.
ETFs as I mentioned earlier trade like ordinary stocks on an exchange. It can be bought and sold throughout the day for a specific price at that specific time.
This means, the price of ETFs can fluctuate up and down throughout a single day when the market is open.
Index funds on the other hand don’t have this ability. Yes. You can put an order to purchase an index fund at 10 in the morning, but the price to which you will purchase that index fund won’t be set until the close of the market that day.
You could have put in an order looking at the price in the morning, but if the market moved drastically throughout the day, you might be surprised to find that the amount which you paid for that fund is different from what you saw when you submitted your buy order.
For index funds, the fund company prices the fund, the net asset value (NAV), only once a day based on the value of the securities owned by the fund.
In essence, you are buying ETFs in real time while for an Index fund, you don’t know the actual price of that fund until later in the evening and even sometimes the following day.
From this lens, ETFs are quite attractive to investors who want to trade throughout the day and know the exact price of their trade.
2 – Fractional Shares
A second difference between ETFs and Index funds is what is known as “Fractional Shares.” Or more specifically if you can purchase the fund in fractional shares.
It sounds fancy, but if you know basic algebra you get the concept. It means just what it sounds like. When you have the ability to purchase a fund as fractional shares, you have the ability to buy a “fraction” of the share. You aren’t locked into needing to buy the whole share.
For example, let’s say VTSAX is trading at $100 per share today. You might only have $50 to invest, so you can just buy a “fraction” of that $100 / share. Essentially half a share with that $50.
Now, VTSAX, the index fund, allows you to purchase the fund as fractional shares. However, VTI, the ETF equivalent, does not.
With VTSAX, it doesn’t matter how much you have, you can invest that full amount into the fund regardless if the money you have is a $1 or a $1,000.
VTI on the other hand, because it does not allow fractional shares, you in essence might have money left over or not be able to afford the share that day. Almost like needing exact change at the grocery register.
One thing I want to call out is that this is Vanguard specific. Other firms, like Fidelity, allow for fractional shares for its ETFs. We will need to wait and see if this trend will be more widely implemented across all investment firms. But for now, if you are invested in Vanguard like me, just know that you can’t make fractional share purchases with VTI.
3 – Automatic Investing
And this segways nicely into the number three difference. Automatic investing.
You can’t make automatic investments or withdrawals into or out of ETFs. This makes sense given you can’t do fractional share purchases of VTI. You’ll need exact change each time so you’ll need to manually make purchases.
For index funds on the other hand, you can set up automatic investments and withdrawals into and out of any of Vanguard’s mutual funds based on your preferences.
If you are an investor who likes the idea of setting it and forget it, Index Fund like VTSAX may feel attractive here.
4 – Minimum
The Fourth difference is their minimum investment requirements.
In this category, ETF like VTI wins. Because they are traded like stocks, there is no minimum investment. You just need enough to purchase a single share.
Index funds, on the other hand, have a minimum. In the case of VTSAX, $3,000.
So for investors who don’t have $3,000 to invest, VTI has a lower barrier to entry.
5 – Cost
Cost is the fifth difference. And this is where an ETF like VTI has an another edge. Though both VTI and VTSAX are essentially tracking the same index, VTI has an expense ratio of 0.03% vs. VTSAX’s 0.04%.
I mean 0.04% is pretty low compared to the industry, but 0.03% is pretty amazing.
So What To Consider When Deciding Between VTSAX & VTI
Now that we’ve covered five key differences between VTSAX and VTI, let me go over which one might be better for you based on your investing priorities.
Worried About Price
If you are the type that is worried about price and you want to have full control over the specific price of the share when you buy, VTI is likely your best choice.
As mentioned earlier, ETFs allow you to buy shares at a specific price throughout the day. If the market is quite volatile in a single day, this could have a huge impact on your investment.
With an index fund like VTSAX, you technically don’t know the final price until the market has closed and the investment firm has calculated the final net asset value of that fund.
Ofcourse, you should realize that trying to time the market could be a dangerous endeavor.
If you are looking to buy and sell ETFs throughout the day, you would be considered more of a trader than an investor.
As the old saying goes – it’s not about timing the market, but time in the market.
But again, if you are the type that likes full control over the price, VTI is your kind of investment.
If you are the type that prefers automation and likes to take a set it and forget it approach, VTSAX is likely your best choice.
As I mentioned earlier regarding fractional shares, index funds allow fractional shares while ETFs do not. This also means you can set up automated investments with Index Funds while with ETFs you cannot.
With ETFs like VTI you have to buy a full share each time. And you can’t automate this.
Whenever you want to purchase VTI, you have to login to your account and with exact change, you purchase a share of VTI based on the price that it is trading at that specific time.
Personally, I love automation.
James Clear, the author of Atomic Habits hammers this idea of systems. He says the key to reaching our goals is about having a system, a process that leads us to that result.
Most people I believe will produce better results with automatic investments. You aren’t trying to time the market or rely on your will to make a trade that day. This is all happening behind the scenes and I believe this will produce better results in the long run.
So if you want to automate your investment as much as possible, VTSAX is your kind of investment.
Worried About Minimum
If you are worried about minimum investment requirements, because you have a limited amount of money to invest, VTI is likely your best choice.
As I mentioned earlier, VTSAX has a minimum requirement of $3,000 while VTI has no minimum requirement. Just the cost of the share.
If you are just getting started and don’t have the $3,000 to invest, go with a VTI.
You want to get into the market as soon as possible so don’t let the lack of minimum requirement be a barrier. At the time of this post, VTI is trading for approximately $240. Get your $240 and start investing right away.
What I Invest In
Alright, there’s a lot that I just covered so thank you for staying with me so far.
Let me share with you what I personally invest in. My goto equities investment is VTSAX.
While some people prefer VTI over VTSAX because of the reasons I mentioned earlier in this post; share price, minimum and expense ratio. Though these are very important and valid reasons, I personally prefer VTSAX primarily because it saves me time.
I like the idea of automating my buy order so that the trade is executed regularly, every month without me even realizing that it’s happening, whether I’m working or on a vacation trip with my family.
Compared that to having to find time on Monday while the market is open to put in a buy order, calculate how many shares I can buy based on the share price, watch it to make sure the order executes and get annoyed by the fact that there are few dollars left over that can’t be invested.
Yes, does VTI allow for specific share prices? Does it have a lower expense ratio? Does it allow me to get into with less than $3,000? Of course.
But for me, I prefer to spend the extra time making more money to invest in the market and with my family.